Q&A

1. Bank Balance Sheet Create a balance sheet for a typical bank, showing its main liabilities
(sources of funds) and assets (uses of funds).
Assets
Cash (includes required reserves and liquidity)
Bank Loans
Commercial loans (biz loans)
+ Working capital loans (for ongoing operations)
+ Term loans (FA – protective covenants):
- amortized loans  periodic pmt (i, principal)
- bullet loans  periodic i pmt , Principal in 1 lump sum
+ Direct lease loans
(tax advantage) Bank  buy FA  lease  firm (no increase in debts)
+ informal line credit (not legally obligated) → Bank can decline
Bank  lends (up to $ for a time)  firm
+ Revolving credit loans (obligated)
Bank  lends max amt  firm
charge i% on unused $$ 
Consumer loans
+ installment
+ credit card
Real easter loans (collaterals)
+ residential
+ commercial
Investment in securities
Treasury securities
Government agency
+ taxes
+ not an obligation on government
 + liquid than T-securities
Municipal (tax free)
Mortgage back securities
Investment-grade corporate
Fed funds sold
Repos
Bank  sell securities  firms
 buy bank securities 
Eurodollar loans
FA
Total assets
Liabilities and equity
Deposits
Demand deposits (Transaction/ checking deposit)
+ checking service
+ small Min balance
+ little interest
Time deposit
+ CDs
- Retail CDs: fixed maturity + penalty for early withdraw + no
organized secondary market + required min balance

- Bull market CDs: rewards → well – performing market

- Board market CDs: rewards → poorly – performing market
- Callable CDs: banks  issued CDs + pay i = 7%
 $$$ corporations
 buy back CDs (before maturity)
`$$$
+ NCDs
- Banks  NCDs (min = $100,000)  corporations
 - Short-term and have a secondary market
Savings account
+ no required Min balance
+ no checking writing
+ withdraw anytime
Money market deposit accounts
+ Secondary market → more liquid than CDs → lower rate than CDs
+ No specify maturity
Borrowing funds
Federal funds purchased (borrowed) → large banks = common borrowers
+ Bank A  $$$  Bank B
 federal fund rate (determine by supply and demand in market)
Repos
+ Bank  sell government securities  corporations
(irepos < fed fund rate: have the collateral)
 $$$ (for the shortage)
t1:  buy back 
 $$$$
Eurodollar borrowings
+ US bank  borrow money  outside US bank (accept dollar deposit)
Discount window/loans
+ bank  $$$  central bank
 Discount rate (lender of last resort)
Long-term source of funds
Bonds
+ Fixed asset (few)
Bank capital
+ Primary capital
 - stock
- RE
+ Secondary capital
- Subordinated notes/bonds (unsecured)
Total liabilities
Common stock issued
Retained earnings
Total equity
Total liabilities and equity

2. Bank Sources of Funds What are four major sources of funds for banks?
- Transaction deposits
- Savings deposits
- Time deposits
- Money market deposit accounts
What alternatives does a bank have if it needs temporary funds?
The bank can purchase Federal funds, borrow from Federal Reserve banks, issue a
Repurchase agreement, or borrow dollars from a bank outside the US (Eurodollars); to
finance long-term assets
What is the most common reason that banks issue bonds?
Banks also own some fixed assets (PPE) which often have and expected life of 20 year or
more  finance fixed assets
10. Bank Use of Funds Why do banks invest in securities even though loans typically generate a
higher return? Explain how a bank decides the appropriate percentage of funds that should be
allocated to each type of asset.
Securities tend to be more liquid and the process to invest in them is easier than loan
investing. The bank percentage of funds is based on the liquidity, rate of return, and risk the
bank chooses to incur.

FOF
Services Provided by Financial Conglomerates
Carson Company is attempting to compare the services offered by different banks, as it would
like to have all services provided by one bank.
a. Explain the different types of services provided by a financial institution that may allow
Carson Company to obtain funds or to hedge its risk.
- Deposit services that create liabilities for the banks
+ Demand deposits
+ money market deposit accounts
+ long term, short term bonds

- Funding services that creates assets for the bank.

+ commercial loans
+ long term, short term credit
+ real estate loans

- Investment banking services

+ execution and advisory service
+ derivatives securities

b. Review the services that you listed in the previous question. What services could provide
financing to Carson Company? What services could hedge Carson’s exposure to risk
- Services that provide funding to Carson Company:
+ commercial loans
+ real estate loans.
- Services could hedge Carson’s exposure to risk
+ advisory service
+ Swap

Off balance sheet activities (Fees + contingent obligation)

Loan commitments
(risk – too many requests) Bank  obligated to lend $  firm
NIF
Bank  buy CPs  firms (fail to issue commercial papers at acceptable rate)

Standby LC
(risk default) A  pay $  B
Fees  Bank  guarantee

Forward contract on currency

(risk – either firms are failed to full fill obligation)
B  sell $ at E/r  Bank (intermediary)  sell $ at Exchange rate  A

Interest rate swaps

A  i pmt in $  B
  i pmt in € 
(bank)

Credit default swaps (insurance against default)

Bank  sell swaps 
 periodic pmt (benefit) 

Risk: default